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Business News/ Politics / Policy/  Budget 2017: Arun Jaitley likely to take the stimulus route to economic growth

Budget 2017: Arun Jaitley likely to take the stimulus route to economic growth

The govt looks to spur the economy through higher public investment in infrastructure, at a time when private investment is showing no signs of a pick-up

Finance minister Arun Jaitley (right) and chief economic adviser Arvind Subramanian. Photo: PTIPremium
Finance minister Arun Jaitley (right) and chief economic adviser Arvind Subramanian. Photo: PTI

New Delhi: Finance minister Arun Jaitley is likely to significantly increase public investment in infrastructure in Union Budget 2017, offering fiscal stimulus to boost economic growth at a time when private investment shows no signs of a pick-up.

There is near unanimity that the economy needs to be spurred through higher public investment, unlike last year when there was a significant divergence of opinion over the need for fiscal stimulus, said an official with knowledge of the thinking within the government. The official requested anonymity.

Last year, chief economic adviser in the finance ministry Arvind Subramanian advocated a stimulus, but the minister decided to stick to the fiscal deficit target of 3.5% of gross domestic product (GDP), fearing a backlash from investors and rating agencies.

“Different schools of thought have argued either in favour of fiscal consolidation and stability or for a less aggressive consolidation and for boosting growth. I have weighed the policy options and decided that prudence lies in adhering to the fiscal targets," Jaitley said in his budget speech last year.

ALSO READ | Union budget: Good economics, good politics, or bit of both?

This year, the economic context in which the budget will be presented on 1 February is different.

Investment demand in the economy is expected to contract in 2016-17 by 0.2% from 3.9% growth in 2015-16, according to data released by the government’s statistics department earlier this month.

The investment scenario further worsened after 8 November when the government invalidated high-value currency notes. Centre for Monitoring Indian Economy Pvt Ltd (CMIE) data released earlier this month showed a sharp fall in new investment proposals in the October-December quarter to Rs1.25 trillion, compared with an average of Rs2.36 trillion worth of new investments seen per quarter in the preceding nine quarters that the Narendra Modi government has been in power.

Clearly, investors have been spooked.

D.K. Srivastava, chief policy adviser at EY India, said the economy needs a “substantial fiscal stimulus" to revive growth, which had started slowing even before demonetization. “Government can revise upward its fiscal deficit target for next fiscal to 3.5% of GDP from 3% of GDP under the existing fiscal consolidation roadmap. Beyond that it can allow states to borrow more for capital investments."

ALSO READ | Should the budget stray from straight and narrow path of fiscal consolidation?

The government may be helped by the recommendations of a committee set up under former secretary in the finance ministry and Bharatiya Janata Party member N.K. Singh to suggest a new roadmap for fiscal consolidation. The committee, which was appointed in May last year, was asked by the finance ministry to examine the need and feasibility of aligning fiscal expansion or contraction with credit contraction or expansion, respectively, in the economy. It has also been asked to examine the feasibility a “fiscal deficit range" . The committee is expected to submit its report on Thursday.

The government official cited earlier said one of the key reasons behind advancing the budget presentation by a month is to give more time to key infrastructure departments such as railways, highways and urban development to implement larger projects as more funds will be made available to them.

Prime Minister Narendra Modi last month told economists at the NITI Aayog that advancing the date of presentation of the Union budget will help speed up investment expenditure in the productive pre-monsoon months.

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Updated: 25 Jan 2017, 02:19 PM IST
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